The Greens/European Free Alliance in the European Parliament (Greens/EFA) recently released a report titled “The Role of the U.S. as a Tax Haven: Implications for Europe” which recommends that the United States should be included in the European Union’s new blacklist of tax havens because of its transparency laws.

According to the report, the U.S. is becoming one of the largest tax havens because the U.S. allows companies to be created without providing beneficial ownership information. Also, the exchange of tax information between EU and U.S. tax authorities is not reciprocal given that the EU countries are required to provide more information to the U.S. than they receive in return.

Recommendations Highlighted in the Report

all countries should establish central public registries of beneficial ownership information for all types of legal persons (i.e. companies) and legal arrangements (i.e. trusts);

the European Union should carefully screen the United States according to the criteria that will be developed for a common European blacklist of tax havens; and

the European Union should introduce a withholding tax scheme on all EU-sourced payments against non-compliant financial institutions, similar to what the United States has implemented under the Foreign Account Tax Compliance Act (FATCA).

This week’s blog post is written by Withum’s International Services Group member, Nicole DeRosa.

Who says taxes are logical? Even Albert Einstein agrees that “the hardest thing in the world to understand is the income tax.” While maybe not the easiest to understand, most taxes and tax exemptions are usually logical… except the few legitimate ones we found below.

China – Chopsticks Tax

In 2006, China introduced a 5% tax on disposable wooden chopsticks in an effort to preserve its vanishing forests. Annual production of disposable wooden chopsticks in China exceeds 45 billion pairs, which is equivalent to about 25 million trees – that is a lot of wood!

Denmark – Fart Tax

Yes, you read that correctly – the fart tax. In 2009, proposals to tax the flatulence of cows and other livestock was quite the hot topic in Denmark. Livestock contribute 18% of the greenhouse gases believed to cause global warming, according to the U.N. Food and Agriculture Organization.

United States – Tanning Tax

Much to the dismay of Jersey Shore’s Snooki, the Tanning Tax was passed in 2010 to help pay for healthcare reform and was meant to deter customers from using indoor tanning salons. The 10% tax was justified by evidence that tanning can lead to skin cancer.

Mexico – Obesity Tax

Aiming to curb unhealthy consumption habits, in 2013 Mexican lawmakers approved an 8% sales tax on high-calorie foods such as potato chips, sweets, and cereal. The controversial tax reform also targeted sugary drinks, increasing the price of sodas by one peso, approximately seven cents. Mexico isn’t the only country that has implemented such a tax. Denmark introduced a fat tax at one point on items that contained more than 2.3% saturated fat. California has implemented the first of this tax in the United States, effective January 1, 2015 called the Measure D Soda Tax which imposes a tax of one cent per ounce on the distributors of specified sugar-sweetened beverages. That’s not too sweet if you think about it!

Ireland – Artist Tax Exemption

Starving artists might never go hungry if they reside in Ireland! According the Taxes Consolidation Act of 1997, income earned by writers, composers, visual artists, and sculptors from the sale of their works is exempt from tax in certain circumstances.

The U.S. Internal Revenue Service (“IRS”) has released revised Publication 597 (Rev. October 2015), “Information on the United States-Canada Income Tax Treaty” (the “Publication”). The 1980 United States-Canada income tax treaty was signed on 26 September 1980. It has been amended by five protocols, the most recent of which became effective on 1 January 2009.

The Publication provides information on the income tax treaty between the United States and Canada. It discusses a number of treaty provisions that most often apply to U.S. citizens or residents who may be liable for Canadian tax. Treaty provisions are generally reciprocal (the same rules apply to both treaty countries). Therefore, Canadian residents who receive income from the United States may also refer to the Publication to see if a treaty provision affects their U.S. tax liability.

The Publication discusses a number of treaty provisions that often apply to U.S. citizens or residents who may be liable for Canadian tax. Specifically, it discusses the following:

Application of the treaty (including saving clause)

Personal services

Pensions, annuities, social security and alimony

Treatment of “other income”

Investment income from Canadian sources

Charitable contributions

Income tax credits

Competent authority assistance

How to get tax help from the IRS and the Canada Revenue Agency

The Publication further notes that taxpayers who take the position that a U.S. tax is overruled or otherwise reduced by a U.S. treaty, referred to as a treaty-based return position, are generally required to disclose that position to the IRS using IRS Form 8833, “Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b).”

In addition, the revised Publication includes information on the relief provided by Revenue Procedure 2014-55 to eligible U.S. taxpayers who hold interests in certain Canadian pension plans, including registered retirement savings plans (“RRSP”) and registered retirement income funds (“RRIF”).

If you have any questions, please contact a member of Withum’s International Services Group at international@withum.com.

Recently, Treasury Secretary Jacob Lew sent a letter to key members of Congress calling for the nation to embrace a “new sense of economic patriotism” and stop supporting corporations that are moving their tax home out of the U.S. to reduce their corporate income tax burdens by taking advantage of an existing loophole in the tax code.

The loophole, known as “corporate inversion,” is a transaction where a U.S.-based multinational group acquires a foreign corporation located in a country whose tax rates are lower than in the U.S. These reorganizations have the effect of changing the U.S. corporation’s domicile to a foreign country but typically results in little change to the U.S. operations of the entity. Although operations in the U.S. would continue to be subject to U.S. tax, the foreign operations conducted by the newly formed group would be subject to the lower foreign country tax rates. In addition, the foreign income is not taxed to the U.S. shareholders until dividends are paid. Moreover, the U.S. corporation may engage in earnings stripping transactions where deductible payments to the parent company reduce U.S. taxable income.

These transactions are particularly attractive to pharmaceutical and medical device companies who seem to have more choices of appropriately sized targets overseas and enjoy many benefits of a global presence. Popular destinations seem to be Britain, Ireland and Bermuda for their lower tax rates and other attractive R&D incentives. Transactions involving pharma and medical device companies have spiked in recent years, most notably the recent merger of Medtronic and Covidien, the attempted acquisition by Pfizer of AstraZeneca, and the AbbVie takeover of Shire, the largest inversion deal to date.

Here’s a summary of how the proposed inversion of Pfizer might have worked:

A newly created UK holding company would acquire the shares of both Pfizer and AstraZeneca. In the resulting structure, Pfizer and AstraZeneca would be subsidiaries of the UK parent and the former Pfizer shareholders would own 73% of the UK company and AstraZeneca former shareholders would own 27%. Pfizer hoped to shift profits to the UK, where the tax rate is around 21% as compared to 35% in the U.S.

For similar types of inversion transactions like the one proposed in the Pfizer deal, the U.S. government has attempted to curb the use of these inversion transactions:

Where shareholders of the U.S. corporation subsequently acquire over 50% of the new foreign parent corporation, section 367(a) causes a gain on the transfer of U.S. stock to the parent corp.

Where shareholders of the U.S. corporation subsequently acquire 60% or more, but less than 80% of the new foreign parent corporation, section 7874 prevents the U.S. corporation from using tax attributes, such as NOLs, to offset section the 367(a) inversion gain.

Where shareholders of the U.S. corporation subsequently acquire 80% or more of the new foreign parent corporation, section 7874 treats the new foreign parent company as a U.S. corporation for tax purposes, effectively removing any real U.S. tax savings from the transaction.

In triangular reorganizations, section 367(b) and Notice 2014-32 causes a potential taxable dividend as a result of a “deemed” distribution between parent and subsidiary on the acquisition of the target foreign corporation in exchange for parent stock.

Under Pfizer’s proposed new structure, the corporation would not have been considered a U.S. corporation for tax purposes under section 7874 because less than 80% of the foreign parent company would be held by the former U.S. shareholders. The U.S. corporation might have had to pay tax under the other anti-abuse regulations of section 7874 and section 367, however it planned to save over $1 billion in tax due to the tax rate differential alone, according to some reports. In other inversion transactions, some corporations were able to avoid the imposition of section 367(a) inversion gain by manipulating certain aspects of section 367(b)(“Killer B reorganization” rules), in order to make the transaction nearly tax free. Much tax planning goes into achieving these various tax savings from moving overseas and the transactions can get very complicated.

The letter from Secretary Lew calls for a lowering of the U.S. corporate income tax rate, among the highest in the world. At the very least, he asks Congress to pass laws to prevent or deter companies from using these inversion strategies, including retroactive laws to prevent tax savings on restructuring deals already agreed to, such as the recent Shire takeover. Despite bipartisan disagreement on how to address the tax loophole, tax reform in this area is likely to occur in some form. However, many tax practitioners and financial experts believe that these transactions will continue to be used at an increased pace until real reform occurs to lower U.S. corporate tax rates. In the meantime, patriotism aside, corporate management will maintain its allegiance to its shareholders and continue to strive to improve the corporate bottom line in the ever-increasing global economy.

The items in this blog are informational only and are not meant as professional advice. Consult with your tax advisor to determine how any item applies to your situation. Kimberlee Phelan writes Where In the World, and any opinions expressed or implied are not necessarily shared by anyone else at WithumSmith+Brown.

Author

Kimberlee S. Phelan, CPA, MBA, specializes in international tax, concentrating her efforts on special projects involving corporate tax research and planning, as well as inbound and outbound international structuring for corporations and individuals. She is actively involved in Withum’s international affiliation of firms, HLB International, serving as the co-chair of the HLB North America Tax Services Group as well as co-chair of the HLB International Tax Committee.

Having travelled to over 40 countries, Kimberlee will write about her experiences in this blog, highlighting interesting discoveries, tax and accounting law changes, as well as important business and etiquette tips.